“ Post office workers and charities fear that many older people could be left without much-needed cash just when they need them. „
Imagine my surprise at being offered a lump sum payment just before Christmas. It came as a huge surprise, though pension companies all over the UK are trying to find ways to make economies, and the reason for writing this review is to forewarn people of the hazards they may put in the path of their lives if they accept lump sum payments without due consideration.
The leaflets that come with these are very cleverly worded, and in some cases leave out salient points that really do need to be considered. In my case, the offer was in the region of £40,000 which would have been a nice lump sum to put into the bank and invest for my future. For people on pensions being offered the possibility of cash up front in exchange for future increases in their pension sounds viable, especially if the pension is fairly high in the first place, but read on because it isn't always as good as it sounds.
DOES YOUR PENSION GO DOWN?
Not really. In effect your pension stays the same unless otherwise explained. What this does mean though is that without steady increases, it won't keep up with the rate of inflation and the value of the pension goes down because the money pays less of your needs in the future simply because inflation increases costs.
DOES IT AFFECT YOUR STATE PENSION ?
Here, it was explained that the state pension will still get the statutory increases and that a private pension does not affect the increases in normal old age pension.
CAN YOU INVEST AND MAKE MORE MONEY ?
Theoretically you can, though the theory doesn't hold out if, like me, the amount you are offered takes you into a higher tax bracket. It really is essential to telephone your tax office and to find out the truth behind the offer. What I found was alarming. Not only would I be taxed on a higher income for this year, but that for all the payments of pension that fall within this year's tax period, I would be charged 40 per cent and thus lose almost half of what I have now per month.
IS A PENSION ADVANCE TAXABLE ?
Here lies another catch. In my case I was told on the form that it would be taxed at 22 per cent. Quite another story emerged when talking to the tax office, since the payment is counted as income and would be taxed at 40 per cent. Now that's a whole lot of difference and means that with National Insurance payments at a percentage rate as well, what the company were offering me was in fact half of what they appeared to be offering.
I am writing this in the hope that one person out there reads it at the right time, and that it helps them to make a wise decision. That piece of paper that offered me so much at a time when people are perhaps a little more vulnerable than at other times because of family pressure really isn't a good time to make decisions like this without looking into them thoroughly and if you get one, it would be wise to do the following:
Check with your tax office about what the situation for tax would be if you accepted.
Check to see what investment rate you can get from that money
Check to see how long a life you think you will live, since this matters. Current health may be a factor, but if you expect a long life then taking the offer could mean living a very frugal life in your old age.
Having checked everything, do get financial advice from a friendly accountant, as the help lines that work for the pension companies are often geared around pursuading you to agree to the payment, and there is no money that is given away through goodwill. The pension companies are trying to make savings. In some cases, it may be worth your while, though only decide that when you are armed with full information, or the mistake may be expensive.
A short term Christmas financial gain isn't worth writing off your future.